SINGAPORE – It can be next to impossible for most of us to work out which investment is a potential gold mine and which is likely to leave us in tears and a depleted bank account, but high-level help has arrived.
The Monetary Authority of Singapore (MAS) has enhanced its existing fair dealing guidelines to now cover all financial products and services on offer here. This means vendors are expected to explain to customers how the various fees and market conditions can lower returns on an investment, instead of just focusing on the potential profits.
It aims to address the common complaint that many sellers of investment products tell customers only the good news so they will not get cold feet if there is a chance that their money will not be as safe as keeping it in risk-free fixed deposits at the bank.
Customers should also be told how they can track their investments by monitoring market conditions to assess if their products meet their financial targets.
This last guideline alone is expected to dramatically halt the bad practice of peddling unsuitable products to elderly and uneducated customers, many of whom are misled into swopping their fixed deposits for higher-yield but risky investments.
Sales representatives will likely find it tough to explain to clients how to log in to online platforms to monitor the status of investments when many of the vulnerable customers cannot speak or read English.
What this means is that those who fail to follow the MAS guidelines and still continue to sell unsuitable products to elderly folk can find themselves in trouble when aggrieved customers lodge complaints with the Financial Industry Disputes Resolution Centre (Fidrec) to get their money back.
Around 80 retirees have taken their grievances to Fidrec in the past two years after being sold financial products that left them worse off. Overall, during the same period, Fidrec received 525 “market conduct claims” involving customers of all ages who suffered investment losses.
With the updated guidelines, customers can expect more transparency in the sale process, such as whether the products are suitable for investors with their level of experience.
They can also expect to be given accurate representations of the investment, especially if it comes with a high risk of big losses under certain circumstances.
MAS deputy managing director of financial supervision Ho Hern Shin says financial institutions are expected to treat customers honestly.
She adds: “Fair dealing should be demonstrated across all activities that impact the customer, from product design to post-sales service. We look forward to financial institutions implementing these guidelines robustly.”
Here are three other important guidelines everyone should know when looking to grow a nest egg.
What to expect from product makers
As a further measure to protect investors’ interest, MAS also expects companies that design and roll out investment products to play fair and have the interests of their customers in mind, especially if those products are meant for the mass market.
Older investors will appreciate this move because it may prevent a recurrence of the pain many went through in 2008, when the collapse of Lehman Brothers bank resulted in the total loss of investment products linked to the bank.
These products were found to be plainly unsuitable for the average investor because they were so complex in their design that many people did not even know what they had bought, let alone understood the risks involved.
Under the new guidelines, MAS expects companies to align products to the needs and financial interests of their intended customers. Financial institutions that sell such investments should also assess their performance under different market conditions or scenarios to ascertain the benefit and value to customers.
For example, in the case of an investment-related product, a financial institution should consider whether it is worth pushing products that are more costly but yet give lower yields to customers.
As most product creators do not deal directly with customers, MAS expects them to obtain feedback from their distributors so that they can understand the needs and risk profiles of their customers.
Accuracy of information
Many online advertisements often state in bold the high yields that some investment funds can achieve. The purpose of such claims is obvious – to make people believe that they can achieve such returns if they invest.
Sellers protect themselves from false advertising allegations by placing a tiny asterisk next to the numbers to lead customers to the fine print at the bottom of the ad which states that the yield is not guaranteed as all investments come with risk.
It is doubtful that such a style of promoting an investment will still be considered as fair under the MAS guidelines, especially when the vendors cannot guarantee the bold claims they are making.
More significantly, such claims are usually meant to woo fixed deposit customers because the projected returns are often higher than bank interest rates.
So customers should always take such bold claims of high returns with a huge pinch of salt unless the vendors can clearly show how their products can be so profitable.
After all, MAS expects all vendors to factor in constraints such as space limitation when designing ads so that the message “remains clear, fair and balanced, and not false or misleading”.
If online platforms want to target customers who are less tech-savvy, they should find practical ways to explain their products and services better to promote suitable investments fairly.
Vendors’ right to review terms
All financial products have clauses in their contracts that give the vendors a unilateral right to revise the investment terms and conditions.
So before you sign up, ask about such “rights of review” clauses and the circumstances that would trigger a review and what you can do.
This is especially important if the review could impact the potential returns or, worse, lead to an increase in cost in cases that involve loans. It is prudent to ask if there are penalties if you cash out when the terms of the investment are no longer favourable.
As any review entails changes to contractual terms that the customer had originally agreed to, MAS notes that negative outcomes from such changes “are compounded for retail customers in particular, as they generally have little or no avenues of recourse”.
While it is not practical to provide customers with a full list of situations that would trigger a review, MAS expects vendors to at least disclose the specific circumstances that would result in a review during the normal course of their business.
If an unavoidable review could result in an adverse or material impact on customers, vendors should put in place fair safeguards, such as having measures to mitigate the impact on customers, as well as giving them early written notice.
While investors should be thankful that the regulator is firmly behind them, they should still do their part in dealing with only licensed and reputable vendors. And those who have low risk tolerance should avoid putting money in unfamiliar products.
Finally, financial institutions should view the updated fair dealing guidelines as a reminder to double down on their best practices to serve their customers better.
After all, today’s customers are far savvier than their parents and they will certainly promote the business to their friends if they receive good and fair service.
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